How do firms learn? Evidence from corporate cash holdings during the COVID‐19 pandemic

Abstract

We examine the impact of COVID‐19 on US corporate cash holdings. Our findings suggest that greater pandemic exposure is associated with higher corporate cash holdings and that firms learn from prior experiences as they manage their cash policies. More specifically, the level of cash holdings in firms that experienced severe financial constraints during the 2008 credit crisis and firms with prior severe acute respiratory syndrome (SARS) and H1N1 exposure is significantly lower than that of firms with no prior epidemic or financial constraints experience. Overall, our findings support the learning behaviour of cash and contribute to corporate cash holdings literature by providing insights on the extent to which firms learn from prior experiences to manage their liquidity.

Mapping the Evolution Trends in Cash Holdings Research: Current Status and Future Directions

“…De Vito and Gómez (2020) investigated data on 14,245 listed firms across 26 countries on cash holdings and predicted that 1/10th of all sample firms would become illiquid within six months, suggesting resorts to the debt market to prevent a cash crunch during COVID-19. Meanwhile, lessons learned in the US showed a positive relationship between corporate cash holdings and the COVID-19 pandemic, (BC and Simpson, 2023) and it reflects that cash is a panacea of the COVID-19 pandemic (Zheng, 2022). As a result, firms have had to adjust their financial strategies for cash holdings policies in a timely manner to weather the storm and protect themselves against unprecedented future events.…”

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